Guide to Intervention for Federally Regulated Property and Casualty Insurance Companies
Date: March 2018
The Intervention Process
The objective of the intervention process is to enable the Office of the Superintendent of Financial Institutions ( OSFI ) to identify areas of concern at an early stage and intervene effectively so as to allow OSFI to minimize losses to policyholders and other creditors of federally regulated property and casualty insurance companies (companies or company).
The Insurance Companies Act of Canada provides a wide range of discretionary intervention powers that allow OSFI to intervene to address any concerns that should arise with a company. All assessments made throughout the intervention process consider the unique circumstances of the company including its nature, scope, complexity and risk profile.
The roles of OSFI and PACICC
OSFI has primary responsibility for regulating and supervising companies. In exercising this responsibility, OSFI conducts risk-based assessments of the safety and soundness of these companies. The mission of the Property and Casualty Insurance Compensation Corporation ( PACICC ) is to protect eligible policyholders from undue financial loss in the event that a member insurer becomes insolvent.
There are no regular supervisory interactions between PACICC and member companies. PACICC works to minimize the costs of insurer insolvencies and seeks to maintain a high level of consumer and business confidence in Canada's P&C insurance industry through the financial protection it provides to policyholders.
Overview of the Guide to Intervention
The objective of the Guide to Intervention is to promote awareness and enhance transparency of the framework for intervening with companies. The Guide outlines the types of involvement that a company can normally expect from OSFI and PACICC by summarizing the circumstances under which certain intervention measures may be expected and describing the co-ordination mechanisms in place between OSFI and PACICC and other pertinent parties.
Interpreting the Guide to Intervention
The intervention process is not a rigid regime under which every situation is necessarily addressed with a predetermined set of actions. Circumstances may vary significantly from case to case and the Guide should not be interpreted as limiting the scope of action that may be taken by OSFI and/or PACICC in dealing with specific problems or companies. The Guide aims to communicate at which stage an action/intervention would typically occur. However, interventions described at one stage are also used at later stages and, in some situations, certain interventions may also take place at an earlier stage than set out in the Guide. Additionally, OSFI and PACICC may choose to implement their powers at different times and/or stages in different circumstances.
No significant problems/Normal activities – If OSFI determines that the company’s financial condition, policies and procedures are sufficient and that practices, conditions and circumstances do not indicate significant problems or control deficiencies, the company will typically not be staged.
When a company is not staged, OSFI has determined that the combination of the company’s overall net risk, capital and earnings makes the company resilient to most normal adverse business and economic conditions. The company’s performance has been satisfactory to good, or key indicators are not significantly less than industry norms. The company may have access to additional capital
| OSFI | OSFI/PACICC Co-ordination | PACICC |
|---|---|---|
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OSFI’s activities/responsibilities may involve:
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Co-ordination activities/responsibilities may involve:
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PACICC’s activities/ responsibilities may involve:
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Stage 1 -- Early warning - If a company is categorized as Stage 1, OSFI has identified deficiencies in the company’s financial condition, policies or procedures or the existence of other practices, conditions and circumstances that could lead to the development of problems described at Stage 2.
The combination of a Stage 1 company’s overall net risk, capital and earnings when considered together, demonstrate an increasing composite risk profile of the institution. Stage 1 is an early warning that serious safety and soundness concerns, and possibly a risk to the company’s financial viability, may develop as a result of one or more of the following conditions:
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The combination of the company’s overall net risk and its capital and earnings compromises the company’s resilience.
- The company’s performance is deteriorating, and is considered to be marginally below industry norms.
- The company has issues in its risk management or control deficiencies, although not serious enough to present a threat to financial viability or solvency, which could deteriorate into more serious problems if not addressed.
- If the company is a foreign insurance company (e.g. a branch), difficulties are evident in its home jurisdiction, or its home jurisdiction’s Regulator has instigated Regulatory actions.
| OSFI | OSFI/PACICC Co-ordination | PACICC |
|---|---|---|
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In addition to its Stage 0 activities, at Stage 1, OSFI’s activities/responsibilities may involve:
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Co-ordination activities/ responsibilities may involve:
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In addition to its activities at the preceding stage, PACICC activities/responsibilities may involve:
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Stage 2 -- Risk to financial viability or solvency – At Stage 2, the company poses serious safety and soundness concerns and is vulnerable to adverse business and economic conditions. OSFI has identified problems that could deteriorate into a serious situation if not addressed promptly, although the problems are not serious enough to present an immediate threat to financial viability or solvency.
One or more of the following conditions would likely lead OSFI to classify a company as Stage 2:
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The combination of the company’s overall net risk and its capital and earnings makes it vulnerable to adverse business and economic conditions, which may pose a serious threat to its financial viability or solvency unless effective correction action is promptly implemented.
- The company’s performance is below industry norms, which is reducing the quantity and/or quality of capital or vested assets.
- The company has issues in its risk management that, although not serious enough to present an immediate threat to financial viability or solvency, could deteriorate into serious problems if not addressed promptly.
- If the company is a foreign insurance company (e.g. a branch), difficulties are evident in its home jurisdiction, or its home jurisdiction’s Regulator has instigated Regulatory actions.
| OSFI | OSFI/PACICC Co-ordination | PACICC |
|---|---|---|
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In addition to its activities at the preceding stages, OSFI’s activities/responsibilities may involve:
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Co-ordination activities/ responsibilities may involve:
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In addition to its activities at the preceding stages, PACICC’s activities/responsibilities may involve:
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Stage 3 -- Future financial viability in serious doubt – If a company is categorized as Stage 3, OSFI has identified that the company has failed to remedy the problems that were identified at Stage 2 and the situation is worsening. The company has severe safety and soundness concerns and is experiencing problems that pose a material threat to its future financial viability or solvency unless effective corrective measures are promptly undertaken. One or more of the following conditions are present:
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The combination of the company’s overall net risk and its capital and earnings makes it vulnerable to adverse business and economic conditions, which poses a serious threat to its financial viability or solvency unless effective correction action is immediately implemented.
- Its performance is poor, with most key indicators well below industry norms.
- The company has significant issues in risk management or control deficiencies which present a serious threat to its financial viability or solvency unless effective correction action is promptly implemented.
| OSFI | OSFI/PACICC Co-ordination | PACICC |
|---|---|---|
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In addition to its activities at the preceding stages, OSFI’s activities/responsibilities may involve:
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Co-ordination activities/ responsibilities may involve:
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In addition to its activities at the preceding stages, PACICC’s activities/responsibilities may involve:
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Stage 4 – Non-viability/ insolvency imminent – If a company is categorized as Stage 4, OSFI has determined that it is experiencing severe financial difficulties and has deteriorated to such an extent that:
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the company has failed to meet regulatory capital and surplus requirements in conjunction with an inability to rectify the situation within a short period of time;
- the statutory conditions for taking control have been met; and/or
- the company failed to develop and implement an acceptable business plan, resulting in either of the two preceding circumstances becoming inevitable within a short period of time.
At Stage 4, OSFI has determined that the company will become non-viable on an imminent basis.
| OSFI | OSFI/PACICC Co-ordination | PACICC |
|---|---|---|
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In addition to its activities at the preceding stages, OSFI activities/responsibilities may involve:
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Co-ordination activities/ responsibilities may involve:
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In addition to its activities at the preceding stages, PACICC’s activities/ responsibilities may involve:
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